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Mexico's auto industry looks to luxury cars

Just when luxury buyers were getting used to the idea that their BMW or Mercedes-Benz could be made in the U.S., the German automaking rivals launch a new surprise: they're both planning to open plants in

Mexico, long a source of auto imports into the U.S., has become so sophisticated at making cars that it's now moving into luxury.

Just when luxury buyers were getting used to the idea that their BMW or Mercedes-Benz could be made in the U.S., both German automaking rivals have announced plans for plants in Mexico. So has Audi, which already has a strong footprint in Mexico through the mainstream Volkswagen brand.

While the automaking world has focused on the U.S., Europe, China and India, Mexico is quietly working its way into the big time. Mexico is poised to pass Brazil this year as the world's seventh-largest automaker, IHS Automotive predicts.

"It has become Motor City South," says Harley Shaiken, chairman of the Center of Latin American studies at the University of California, Berkeley, and an expert on auto industry labor issues.

Moving into the auto industry's top echelon, luxury car manufacturing, is an accomplishment because of finicky levels of quality required, such as the tight gaps between body panels, and more complex engineering in the product.

Now automakers will do it where the Center for Automotive Research says some workers make as little as $2.50 an hour. Total average labor costs amount to about a quarter of what U.S. workers cost, even less compared with German workers.

But it isn't just low wages luring companies to Mexico. It's also Mexico's portfolio of free trade agreements, which allow it to be a free export hub for virtually all of South America and for other countries around the world. "Mexico has more free trade agreements than any country in the world," says Joe Langley, principal analyst for IHS Automotive.

Among luxury makers, Audi arrives in 2016, followed by a Daimler/Renault-Nissan joint venture for Mercedes and Infiniti luxury cars, then BMW in 2019, says IHS Automotive. Most mainstream makers, including the Detroit 3, already have plants in Mexico and are busily expanding or adding new ones, with VW, Honda and Mazda this year, and Kia in 2016.

Mexico's automotive output will have increased 60% from last year to 2020 for more than 5 million cars. Last year, fewer than one out of five cars being sold in the U.S. were made in Mexico. By 2020, more than one out of four will be built there.

Although German luxury makers made headlines with their decision to build Mexico plants, the real breakthrough came with Japanese makers, says Langley, as they realized their vulnerability in their home country after the earthquake and tsunami in 2011 and began to diversify to Mexico.

The Top 10 automaking countries in vehicles built in 2013, the latest full year of data: